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U.S. election: Trump or Biden,
and the outcome no investor wants

21 October 2020




With all eyes on the US as the country gears up for the presidential election, we consider three possible scenarios and the impact they would have on financial markets worldwide.

History suggests President Trump is unlikely to win the upcoming US election. Since 1932, no incumbent US president has lost an election…that is unless a recession occurred during their presidential term.disclaimer It gets worse when a recession occurs sometime in the last two years of the president’s first term. Since 1901, the only president to successfully be re-elected under these circumstances was Harry Truman in 1948, the recession occurring the same month voters took to the polls.disclaimer

With the U.S. officially entering a recession in February this year, that statistic doesn’t bode well for Trump; however, he is a man used to proving his doubters wrong, and if the 2016 election - which Clinton was expected to win comfortably - taught us anything – it is that anything is possible.

Whilst difficult to argue the current recession has been caused by Trump policies, rather than a gigantic ‘Black Swan’ in the form of COVID-19, Trump’s political platform has been successfully built on a narrative of share market and economic success.

His initial handling of the pandemic included inconsistent messaging and a seeming disregard for scientific evidence (ironic given his own recent infection). His failure to implement a unified national approach has been condemned by some commentators as leading to a weaker U.S. economy, and has seen Trump scrambling to not only reassure voters the government has managed the pandemic well but that a swift rebound is imminent once a vaccine is found. Trump would have been well served to heed the words of Martin Van Buren, 8th U.S. president and founder of the Democrats who said, "It is easier to do a job right than to explain why you didn't."

Trump’s approval ratings have subsequently slumped and his opponent Joe Biden is the firm favourite to win the race to the White House, ahead of Americans heading to the polls on 3 November. DWS Group (tactical asset allocation advisor to the ANZ Private Bank and Advice investment team), currently have Biden sitting at a 76% probability to claim the presidency.

Whilst the presidency is a two-horse race, there is a myriad of possible outcomes for Congress on election day - each with its own consequences for financial markets. DWS Group believe there are three outcomes which are most probable.

Potential outcomes according to DWS Group

1. Blue wave - Biden presidency with the Democrats controlling both the Senate and the House

2. Status quo - Trump presidency with Democrats controlling the House whilst Republicans control the Senate

3. Biden reigns over split Congress - Biden presidency with Democrats controlling the House and Republicans controlling the Senate

Election outcome probabilities (DWS Expectations) - Chart 1


Source: DWS Investment GmBH, 19 October 2020

Blue wave

A Democratic sweep is potentially the worst outcome for markets - in the near-term anyway - allowing a Biden government to enact mooted changes more readily. Biden has run his campaign on a platform of increased regulation, tax hikes and clean energy. With previous tax-cuts enacted under Trump likely to be rolled-back and regulation of specific sectors heightened, corporate America and company profits are likely to come under significant pressure - in particular small caps and cyclicals in Financials and Energy. Under this scenario defensive stocks may be the beneficiary.

It’s not all bad news for the share market however. Whilst relations with China are likely to remain strained regardless of president - the anti-China sentiment has bi-partisan support - Biden is expected to bring about an improvement in trade relations with traditional U.S. allies and has already floated significant domestic infrastructure spends.

Additional fiscal stimulus measures would also be delivered more readily, when and if decided, offering greater certainty for investors. The recent delay in Congress agreeing to terms on the latest fiscal stimulus package demonstrates the impact a split congress can have in times of crisis.

Status quo

A Trump victory, in which Democrats control the House, could see markets rally in the near-term and should be positive for those cyclical stocks most susceptible to a negative shock from a ‘blue wave’ outcome.

When Trump won in 2016 there was an initial lift in markets, his pro-growth agenda, which served the U.S. economy well until COVID hit, is unlikely to change.

According to DWS Group, a Trump victory would also be supportive for the U.S. dollar, which may come under pressure if Biden wins. DWS Group Chief Investment Officer APAC and Head of Emerging Market Equities, Sean Taylor, explains, “We believe that under Trump’s administration, there will not be much fiscal expansion. Hence the USD is unlikely to weaken.”

Biden reigns over split Congress

We view this as potentially the best short-term outcome for markets.

Under this arrangement, it is likely Trump’s pro-growth agenda would continue under a Biden presidency, his administration’s ability to implement legislative policy changes - dial-back tax cuts or introduce greater regulation - will be significantly diminished with Republicans controlling the Senate.

In short this would provide Americans with the same supportive backdrop for corporate America, with a more stable and predictable leader on the trade front.

The not so dark horse

There is a quasi-fourth scenario which could be the least favourable outcome for markets. A protracted count and delayed result - which is a much lower, but very real possibility.

Trump has already raised concerns over postal ballots, demonstrating an unwillingness to concede an election loss and refusing to commit to a peaceful transfer of power in the event of a Biden victory. 

Markets don’t like uncertainty, as evidenced by the most recently contested election in 2000 between George W. Bush and Al Gore - which was eventually settled in the U.S. Supreme Court. On this occasion, the S&P 500 fell more than 10 per cent by the end of November, the Nasdaq plunging 19 per cent.

Any immediate sell-off is expected to be short-lived, however it could be chaotic according to Taylor, “An unorderly US election process, on top of COVID-19, could become meaningful market movers. Markets have been pricing in high volatility ahead with the VIX index moving higher.  We expect high volatility in risk assets in an event of an unorderly US election and a flight to safety to safe havens such as Treasuries.”

In recent weeks however Biden has begun to pull away in the polls, and it appears the market has tempered expectations for a contested election. The below chart highlighting the change in market expectations, since October, from the earlier anticipated spike in volatility in November.

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VIX implied volatility (S&P 500) - Chart 2

Sources: Bloomberg Finance L.P, DWS Investment GmbH, as of October 2020


Whilst many pundits view a Republican government as traditionally more supportive for financial markets, according to CFRA Research, since 1945 it is actually the Democrats who have resided over better performing share markets during their term. The reality is that whilst any election outcome is likely to result in a sudden shift in markets, either positive or negative, its relative impact should be short term.

The ANZ investment team has been positioning its diversified portfolios with a slight underweight to growth assets, having recently trimmed this position following the sharp downturn in equities. We are now looking to return our growth/defensive mix to benchmark weights ahead of the US election, given uncertainty of the result’s impact on markets, regardless of who wins.

Head of Portfolio Management, Dan Simpson notes that: ”sound portfolio management is not about taking large positions on single events. We advocate for a diversified and long-term approach to investing. Whilst there are short-term opportunities which arise and which can be exploited, the US election result and its consequences on markets are too uncertain to warrant betting the house on one outcome. We always suggest clients speak with their advisor about their long-term investment strategy and whether it is right for them, rather than focusing too much on short-term gains. The risks are just too high.”

The sentiment is echoed by MFS Investment Management, Portfolio Manager, Roger Morley: “History has repeatedly shown that even if you guess the correct outcome for such events, markets don’t always react as you may have expected. This election may see changes, notably to corporate taxation and regulation, which may impact companies in our portfolio. With this caveat, our approach remains focused on well managed, sustainable, good quality companies who can compound their growth through a full business cycle. These businesses are typically global, operating in multiple markets with multiple bands.”

As Morley notes, the Boston based firm, who manage more than US$500b in assets, is not taking a short-term approach to the election. “We are not trying to trade the market. Our long term fundamental approach requires we spend a lot of time understanding what can go wrong and prefer companies with numerous levers they can pull in managing their business and maintaining their growth and profitability under a multitude of scenarios.

While the election may have short term implications for some companies, particularly more US centric ones, we are very confident they can navigate any short term issues that may arise."

Our expectation is for a Biden victory, however whilst the odds seem firmly stacked against Trump, if the 2016 election result and events in 2020 have taught us anything - it is that anything is possible.

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below

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JP Morgan “How will the 2020 US presidential election affect markets?” 14 January 2020


Newsweek “All the U.S. Presidents Who Won Re-Elections During a Recession” 20 March 2020